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Monday, June 8, 2020

The Fundamentals for Gold Are As Strong As Ever

Although businesses are reopening, the economy faces multiple headwinds, including massive debt and deficit spending. Here's why that's good for gold.

As businesses slowly reopen after nearly a three-month lockdown, FXEmpire's Arkadiusz Sieron delves into what Americans, along with gold investors, can expect as the climate normalizes. Although dubbed the "Great Unlock", the reopening isn't a single sweeping action performed by the government, just as the lockdown wasn't.

Sieron notes that various state-level entities, as well as citizens themselves, began applying preventive measures before any governmental say-so and, in some cases, extended the measures past the mandatory level. Similarly, the reopening of the economy and the continuation of business will be far from the flip of a switch that some are expecting.

As an example, Sieron points to the restaurant industry, which accounts for around 16 million jobs in the U.S. Even if the government was to allow all establishments to fully open up, many consumers would find themselves with a newfound skittishness in regards to being in a large and dense crowd. 
This is just one example of how the economy could struggle to get back on its feet for some time.

This brings Sieron to the idea of a V-shaped or quick recovery, one which many are hoping for, and yet one that even the Federal Reserve isn't too optimistic on. All of these issues tie closely to gold and how the metal was performing throughout the pandemic.

It's no secret that the metal was the best-performing asset during the onset of the lockdown, as unprecedented uncertainty caused it to soar to seven-year highs. As one might infer from gold inching just below $1,700 last week, traders are likely hoping that the heaps of stimulus and heightened economic optimism will pour over into the coming months. In truth, however, the global economy was far from flourishing heading into the pandemic.

Interestingly enough, the broad asset sell-off in March was the first major hurdle that gold experienced in more than six months, as the metal had been climbing due to numerous sturdy fundamentals. The tables began to turn around mid-2019 as central banks embraced low or negative interest rates, which have all but become the norm as a response to the pandemic. The slicing of benchmark rates brought to the forefront all of gold's strong tailwinds, which many pointed to as the metal's perfect storm.

To be sure, the return to pre-pandemic economy strength will be a gradual process, with plenty of question marks along the way. Yet perhaps the most important takeaway for gold is that the global economy was in a state of contraction prior to any mention of the virus, while the domestic economy was feeling the weight of seemingly unsolvable debt and excessive fiscal spending, along with a host of other issues. Besides potential currency debasement as a result of stimulus measures, the pandemic could also strengthen gold's upwards trajectory by greatly exacerbating the issues of federal and national debt, to speak nothing of the economic sluggishness itself.